An Equity Release Home Reversion Scheme is one of the options available in the equity release marketplace. However, they are not nearly as well known or understood as lifetime mortgage schemes.
Home reversion can be an effective solution for many people in need of additional money in retirement, be it for a holiday, home repairs, or even to buy a new car. However, it is not the right solution for everyone. Your circumstances and your specific needs will come into play, which is why it is important that you speak directly with a specialist equity release home reversion plan advisor about your situation.
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Home Reversion Schemes are fairly simple to understand. What happens is that you sell a portion or the whole of your home (25% – 100%) to a home reversion company in exchange for a lump sum or monthly income, that can be used for any purpose, and the guarantee of living in your own home for the remainder of your life.
The total amount of money available is based on the value of your home, but you do not receive the full market value for the percentage of your property that you decide to sell. After your home reversion scheme completes you will essentially become a tenant of sorts in your own home, where you will still be responsible for keeping the property adequately insured and in good repair, as well as continuing to pay your council tax.
The amount of money that you get will vary depending on how long you are expected to live, as well. If you are younger, a reversion plan will give you less money than older homeowners or someone who has a shorter life expectancy. The reason that this occurs is because home values fluctuate, and if a reversion company gives someone too much money, they could lose money when the home is sold in 20 or 30 years. Therefore, home reversion plans are better suited to older homeowners.
Here is an example of an Home Reversion Scheme in action:
A man who is 73 years old has a home valued at £360,000. He chooses a home reversion plan to get an average of 45% of the value that he sells. If he chooses to sell half of the home, the home reversion plan would pay out approximately 45% of £180,000, which would be £81,000.
If the man were aged 83, he would likely get 55%-65% of the value of the portion sold when doing a home reversion, simply because he has a much shorter life expectancy.
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There are many reasons for considering the release of equity through a Home Reversion Plan, one of which is to help mitigate Inheritance Tax.
An example of Inheritance Tax mitigation:
From the previous example, upon the man’s death, the family would inherit the part of the property not subject to home reversion. If the house were valued at £500,000 the inheritance would be £250,000. As this falls below the Inheritance Tax Threshold (IHT), there would not be an IHT liability anyway (assuming a nil value to the rest of the estate). However, lets say the property were valued at £1,000,000 and the inheritance valued at £500,000 an Inheritance Tax Liability would arise. This would however, be reduced by the Home Reversion scheme on 50% of the property, which will be outside the IHT calculation.
Many people are skeptical for valid reason when considering home reversion plans as a way of mitigating inheritance tax. This is to be expected, especially since no one knows when the levels will change or how policies will vary over time. This could cause a lot more hassle than it is worth when the future is so unknown. For this reason it is always recommended that you discuss your equity release requirements with an independent advisor.
What is a Lifetime Lease?
A Lifetime Lease is often confused with Home Reversion Schemes. The difference however is that a Lifetime Lease makes it possible to sell your existing home and move to a new home at a discounted rate, with a choice of virtually any house on the market.
The Lifetime Lease requires a single discounted one off payment, that then allows you to remain in the new property for the rest of your life, without the need to pay a mortgage or rent payment.
Like a Home Reversion Plan the discount you receive is based on your age, with older homeowners receiving a higher level of discount. The agreed sale price is then reduced by the level of the Lifetime Lease discount. The main criteria for acceptance is that you must be age 60 or over, unlike a lifetime mortgage which can be considered from age 55.
Alternatives to Home Reversion Schemes
When considering a Home Reversion Schemes, Equity Release or Lifetime Mortgage Scheme, there are always alternatives worth consideration.
The following are an alternative to Home Reversion Plans
- Downsizing
As an alternative to Home Reversion, this is probably the main one. The main advantage, is that you do not loose out by selling a portion of your home below market value, and if compared to a lifetime mortgage, no interest is charged. - Borrow from family members
Some people consider selling there house or part of it to a family member, and arranging a lifetime lease to continue living in the property. This is always an alternative, but carry’s with it an number of potential problems. If considering borrowing from family, you should always seek out independent legal and tax advice. - Use any investments or saving you may have first
This may seem obvious, but many people who consider Home Reversion Schemes, do so before considering the alternative of using existing assets. Remember, you always have the security of your house being there in the future - Sell or Rent
This basis of this alternative to a Home Reversion Plan, is that you sell your existing property, and then rent using the income from the invested sale proceeds to pay the rent. This alternative can only really be considered by those with house values which are typically £400,000 or more. However many pitfalls are present, and so you should always consider advice from an independent equity release adviser. - Remortgaging
For those with sufficient income, remortgaging as an alternative to equity release may be an option. Different lenders have different age restrictions, but there are normally sufficient options available. As interest rates can be lower for a remortgage than a lifetime mortgage, for those with disposable income, and or family that would be willing to assist with the monthly interest payment, a remortgage can provide more flexibility and a controllable cost that will not erode the equity in the property over time. - The availability of local authority Home Improvement Grants
Where you are looking to release money for essential home improvements such as a leaking roof, you should always talk to your local authority first to see if there are any grants available.